Definition and meaning of Liquidation Value
Liquidation value can be defined as the estimated amount of money that could be received quickly through the sale of an asset or a company. Put another way, the liquidation value refers to the worth of the physical assets of a company as it steps out of business or if it were supposed to go out of business.
The liquidation value is explained by Investopedia in the following manner. If a company were to be sold off instead of being liquidated, both liquidation value as well as the intangible assets would be taken into account to calculate the going-concern value of the company. Besides, liquidation value also refers to the cash value of a single asset.
Significance of Liquidation Value
Many investors, in the business of making money, want to know everything about a company, be it potential earnings or expected liquidation value. The liquidation value is generally used for the purpose of bankruptcies. Besides, lenders who are considering the application of a borrower also use liquidation value. In addition, bondholders are also interested in knowing the liquidation value as they are also considered as debtors to the company.
Calculating the Liquidation Value
Liquidation value is estimated through assets like fixtures, real estate, equipment, and inventory owned by a company. Intangible assets (like goodwill, business’ intellectual property, and brand recognition) are, however, not counted in the liquidation value of a company.
The liquidation value is calculated as follows:
- Get a copy of the latest annual report. This report can be requested by contacting the Investor Relations department of the company. Besides, it can also be downloaded directly from the website of the company.
- Find the line item assets and liabilities where assets refer to the complete range of assets owned by a company and liabilities represent the debt taken on by the company to purchase these assets.
- Determine the expected liquidation value. This is done by subtracting the company’s liabilities from its assets.
To conclude with, the liquidation value presumes that the sale is carried out by a seller who is compelled to sell and presumes an exposure period which is lesser than the market norms.